The Big Squeeze

Maui's push for high-end tourists has yielded, not only a desired visitor boom, but also escalating housing costs, workforce constraints and a throttled infrastructure. Does Maui Land & Pine have the fix?

October, 2005

Maui Land & Pine’s David C. Cole at times can sound more like a preacher than a chief executive officer, though one who calls upon the Almighty Bar Chart, not the Good Book, to lead people to his promised land.

In the company compound in Kahului on a sunny, summer day, the bushy-goateed Cole is speaking of the future of Maui Land & Pine Co. Inc. (AMEX: MLP). His buzz words are holistic communities and sustainability and Cole is talking about core values, preserving cultural heritage, building affordable housing and setting aside land for schools.

Is that the business of one of the state’s largest publicly traded companies? A company that was losing millions when Cole was brought on in 2003 to jumpstart operations?

“We’re not missionaries,” begins Cole, chairman, CEO and president of ML&P. “We are just playing to cards we were dealt, the best way we can.”

This is where the bar charts come in. What Cole and ML&P are facing is the same dilemma faced by every growing business on Maui. Property values have skyrocketed and low- to even middle-income workers often can’t afford to buy a decent home.

The median sales price for a single-family home on Maui in June 2001, was $289,500, according to the Realtors Association of Maui. In June 2005, the median price was $735,000. That’s a staggering increase of 154 percent in five years.

Then consider that the unemployment rate on Maui this year has hovered in the extremely low 2 percentile range.

The economy on Maui is booming, but in its wake have come skyrocketing housing costs and workforce scarcity, a double whammy due in part to the Maui’s effectiveness in drawing high-end tourists, some of whom end up buying a second home and arguably pricing locals out of the market more than on any other Hawaiian island.

In repeated interviews about the state of the economy, Maui leaders beamed about the general good health across the sectors, particularly in the high-tech. However, Maui continues to face a strained infrastructure, and leaders all say the No. 1 and No. 2 concerns about economic growth on the Valley Isle and its neighbor islands are escalating housing costs and a dwindling workforce pool as locals leave and potential newcomers are discouraged by the price of land.

No sector is unscathed. Jeanne Skog, executive director of the Maui Economic Development Board, says she recently asked a high-tech company official how she could help him market, a primary function of the board. “He said, ‘You get me the work force. I can get the work,'” recalls Skog.

To grow, Maui businesses need to think about how to attract people to work, even in decent-paying, middle-management positions.

“We are bidding on scarce resources,” Cole says.

That’s how land-rich ML&P got into the business of building affordable housing and developing schools. “We want to become the employer of choice,” Cole says. “That means understanding what is important to people in their prime earning and child-bearing years. That is unquestionably No. 1, having quality housing. No. 2, it is having educational opportunities for their children.”

Rippling underneath the surface of the housing and workforce concerns are also concerns about the fading of the community character itself. If locals can’t afford to live here, what happens to the aloha?

Cole is not the only one talking about what needs to be done, in a sense, to recover from these economic good times.

HEY, BIG SPENDER; IT’S A BOOM

One of the first things Terryl Vencl, executive director of the Maui Visitors Bureau, points out is that it has been more than a decade since Maui has added a resort hotel, not since the Ritz-Carlton, Kapalua, was built in 1992. Several years back, Maui decided the best avenue to grow tourism was not to attract more numbers, but bigger spenders. The industry term is high-end tourism.

At the same time, Maui has, more than other counties, put financial resources into targeting visitors and building its brand name. Typically, she says, county bureaus run on a set allocation from the state Transient Accommodation Tax alone. But Maui County funnels some of its county funding from the TAT to the bureau as well.

That means Maui has more money for such things as targeting the avid traveler, who understands the uniqueness of a destination and will pay extra for it; and markets such as the romance market, which spends more than any other niche market. That also means Maui has funds to develop travel agents who understand Maui and sell it to the “cream of the crop,” Vencl says.

Maui’s marketing strategies have paid off.

This year, Maui appears fully recovered from the blows of 9-11 and SARS and is experiencing a 2.5 percent increase in visitors through June, building on a half-percent increase in 2004 and a 2.7 percent increase in 2003. Those visitors set the occupancy rate for hotels at 81.8 percent for January through June 2005. Maui’s average daily room rates for 2005 are the highest in the Islands at $208. In comparison, Oahu has a $133 daily room rate this year.

Barring a few unforeseen events, those numbers, which are largely driven by domestic tourism, should persist. And the tourist industry strength is also propelling and should continue to propel blazing construction and real estate industries.

One statistical measure of construction industry health is the estimated value of private construction permits. Tracking that number from 2001, the value drops from $313 million to $274 million in 2002; then it jumps up to $469 million in 2003 and $449 million in 2004. The industry is largely being driven by residential building, demonstrated by the vast majority of new permits issued in that category.

The escalating prices of real estate have not decreased the volume of sales, so the overall health of the market remains good.

However, according to First Hawaiian Bank’s 2005 report Maui County: Flourishing Again in 2004, construction and real estate are not the only sectors doing well; the service sectors “professional, business and medical” are strong.

High tech in Maui is also becoming an economic highlight. In the long view, from 1982 to the present, high tech has gone from employing 150 people to 1,300. A graph MEDB uses to illustrate how far high tech has come compares the revenue from high tech to large companies on Maui. High tech created $140 million in revenues in 2004, compared to Hawaii Commercial & Sugar Co. at $113 million and Wailea/Makena Resorts at $181 million, MEDB reports.

This coming year, plans are to expand the high-tech park as a new, 35,000-square-foot building are out for bid and Boeing is expanding its facilities atop Haleakala.

“And after 9-11 none of our companies were affected,” Skog says. They behaved as we had hoped.”

THE TAB FOR SUCCESS

The sun rising over Haleakala Crater, as it awakens the volcanic red swirls and spears the clouds at 12,000 feet, is a rare, spiritual event. Problem is, some visitors are watching it from their idling cars.

The boom in tourism has introduced unwanted issues for both visitors and residents. Much has been written about infrastructure issues, in particular transportation and water woes for Maui.

The increasing number of cruise-ship visits, the conversion of homes into illegal rentals, and the timeshare trend have also created new issues for Maui to manage. The issue of carrying capacity, though–best illustrated by the Maui signature experience of the Haleakala sunrise now touched by traffic concerns–has brought the issue to new heights, literally and figuratively.

Arakawa has created a committee to research the full impact of cruise ships on Maui. Those issues range from the direct impact on traffic at visitor sites to financial considerations, because it is unclear whether cruise ships are contributing their fair share of tax dollars to Maui to deal with their impact. A report is expected out this fall.

The mayor is also studying the economic impact of a market trend of converting hotel rooms to timeshare. It is unknown how that change in visitor profile will impact Maui’s push to get fewer visitors who spend more. Maui has already instituted a property tax on timeshares to address infrastructure impacts.

A big issue for businesses on Maui, says Maui Chamber of Commerce president Stacie Thorlakson, is illegal rentals. On the wave of tourism strength, Maui has seen a conversion of homes into rentals units, primarily by out-of-state investors, Thorlakson says. Unlike hotels, which pay a tax to support managing visitor impact, these rentals are under the radar.

“One of our major issues is regulating vacation rentals,” says Thorlakson. “Our members want to put a tax on folks who own such rentals as unpermitted bed and breakfasts. They want an even playing field.”

But Thorlakson, too, says the No. 1 issue for Maui businesses is still affordable housing, with workforce concerns in tow.

For his part, the first-term mayor says he has aggressively worked since his election to solve the affordable housing dilemma. Arakawa has worked with developers to add components to their projects that he believes will meet the demand for affordable housing before the end of 2007. Arakawa says 4,000 units will be built in the next five years that fall in the affordable-housing category.

John Stephens, president of the Realtors Association of Maui, says the mayor’s initiative for affordable housing is a positive development. However, he worries about new trends such as the potential arrival of Chinese investors. While the housing market might eventually cool on the Mainland, it might not on Maui, he says.

“The question is whether there is another thing looming out there,” Stephens says. “And whether we can keep up. We need to build more houses. We need land reform. It is very difficult to tell [local] people, they cannot afford a home.”

THE LONG VIEW

Hawaii tourism was founded on the advent of cheap oil and fast airplanes. Seemingly overnight, Hawaii became a major tourist attraction. In a mad scurry to respond to the demand, hotels were built, on the beach, side by side.

“Instead of a beach experience, it almost became an urban experience,” says Cole. “A lot of resort areas that came alive on cheap oil and fast airplanes ended up feeling that way. Whether it was Acapulco, Rio De Janeiro, Miami Beach or Waikiki. I think that has about played itself out.”

Cole believes Maui’s future and the future of Hawaii as a state lie way up-market. “If you are looking for sand and rum-based drinks, they are a better value elsewhere,” Cole says.

Other places can offer beautiful vistas. But only Hawaii has the aloha. ML&P’s plan for the recently acquired Kapalua Bay Resort is to target culturally sensitive tourists who are looking for a unique experience and are willing to pay for it. Something that builds upon Maui’s work over the last several years, but ML&P is taking it to another level.

“If you want to know what the Kapalua customer of the future looks like, it is somebody who shops in Whole Foods [a retailer of natural and organic foods], on the West Coast. That is our customer. He is wearing a Patagonia shirt and reading Coastal Living magazine, and he is not price sensitive,” Cole says. “We want to be ruthlessly discriminating.”

MVB executive director Vencl agrees, and says campaigns to develop more cultural tourism and agriculture tourism are geared toward that kind of traveler. The philosophy in Maui today is to maintain market share when it comes to visitors, not expand, she says. The business sector in Maui also seems keenly aware of issues of sustainability. “Balance,” says the Chamber of Commerce’s Thorlakson. “That is the word everyone is looking for right now.”

In ML&P’s case, the company is investing land and big dollars into creating balance. On 312 acres of ML&P land north of Lahaina, the Pulelehua project is a master-planned community with 882 homes, of which more than 50 percent will be affordable under federal guidelines. That means 450 quality two- and three-bedroom homes ranging in price from $190,000 to $300,000 in one of the most expensive areas on the island. Employees would get preference in these fee simple offerings. The market homes should range from $300,000 to $700,000.

The project is expected to cost about $75 million in infrastructure improvements and $350 million in vertical construction. The first homes are expected by 2008 and the last in 2012. The housing will also be close to the resort to cut down on cross-island traffic. Thirteen acres are also designated for a school.

On the tourism side, ML&P is spending $85 million to upgrade the resort and move upmarket with a new spa, a beach club, a golf course, a mountain activity center and nature trails.

ML&P agriculture operations are moving upscale, too. ML&P is transitioning from the pineapple commodity market to the specialty market, where customers are willing to pay more for a superior product. In fact, the same customer that might buy the company’s fresh fruit, might also visit its resort, Cole says. The idea is the same. It may cost more to do business, but people will pay more if the product is special.

That’s why cultural preservation is good for the tourism business, too, he says. Cole is a kamaaina and admits it gives him great personal pleasure to work for the betterment of Hawaii as a whole. In fact, that is largely why he took the job and returned to the Islands. But Hawaii’s culture is also what makes its tourism special–and marketable. “Without the local culture we lose our distinctiveness. It’s very different from being a missionary,” Cole says. “As a business, we want to make money.

“At some point, you move from a rural, authentic Hawaiian vacation experience into something that is closer to fighting through the traffic jams of Los Angeles. Or coping with the societal disturbances that come from a concentration of wealth, where you feel threatened by those that are the have-nots. That doesn’t suit anyone. Go to Haiti, and you sense that. There are a lot of places where the hospitality model has failed through exploitation and greed and short-sightedness.”

Cole says it’s time to take the long view of progress in the Islands, and plan for decades of success, in large part by business investing in the people, in Hawaii.

But will his stockholders understand that thinking?

“[Maui Land & Pine] stock is no stock for an impatient investor,” Cole says. (It doesn’t hurt that ML&P’s largest shareholder is Cole’s friend and business partner, Steve Case.) “I don’t want them. My shareholders understand this, my colleagues understand this, my family understands this. It is time to get down to core values.”